History Provides Value-Added Examples

Although value-added taxes often are linked with Europe in the American imagination, the VAT is pretty much a universal phenomenon beyond U.S. borders.

“If you look at a map of all the countries in the world that have a VAT, it’s astonishing,” said Ajay Mehrotra, a professor at Indiana University’s Maurer School. “There are very few countries that don’t have a VAT. The U.S. and Greenland kind of stand out.”

In fact, the U.S. has flirted with adopting a national consumption tax at various times in its history. In the 1920s, when the income tax was still in its infancy, for instance, there was “a real chance for the U.S. to adopt some sort of crude consumption tax,” Mehrotra said, but the effort was defeated in part because of opposition from business groups.

During World War II, several prominent members of Franklin Delano Roosevelt’s administration supported a national sales tax, including Vice President Henry Wallace. But progressives in Congress blanched at the proposal, possibly to the long-term detriment of the social-welfare programs they supported.

“By resisting a general sales tax so much, they missed the boat on consumption taxes, which the rest of the world used on a bigger welfare state,” said Joseph Thorndike, a historian and columnist for Tax Notes magazine. “They let progressive taxation get in the way of progressive government.”

By not adopting a crude consumption tax in the early to middle part of the 20th century, U.S. policymakers made it less likely that subsequent Congresses would institute the kind of sophisticated VAT systems that grew almost organically in other countries.

Nevertheless, the U.S. may have also benefited from sitting on the sidelines, as it now has a wide variety of examples to learn from if the country ever decides to seriously consider a national consumption tax.

“We have been looking at this very carefully, and the VATs to use as your models are Singapore, South Africa, New Zealand, Australia and Canada,” Michael Graetz, an alumni professor of law at Columbia University, told a Ways and Means hearing in 2011. “Talking about Europe is nonsensical, because Europe’s VATs are ancient.”

Graetz noted Republicans might find Canada’s VAT particularly appealing because the tax on consumer purchases is clearly stated on sales receipts — a step that keeps the levy visible to consumers and helps prevent politicians from raising it recklessly.